In short, they make life easier in a decentralized environment.
Why are ERC-20 tokens needed?
ERC-20 makes it easier to create new tokens, which is why Ethereum became the most popular ICO platform in 2017.
ICO (Initial Coin Offering) is a type of crowdfunding, except that backers receive newly created tokens. This is a way for crypto economy companies to raise capital and finance development.
The trading price for one ETH at the beginning of January 2017 was about $8. Two months later, that figure had quadrupled, and the rest was history. The price of one ETH reached a record high of $1,440 on January 13, 2018, an 18,000% increase from the previous year.
This happened because ICOs raised millions of dollars on “promises” in their white papers, and many had no actual working product.
Speculation became sublimation, and every project was embellished no matter how long it would take to implement features and developments.
Now, in 2021, Ethereum will become the main network behind the decentralized finance (DeFi) industry due to its strength as a smart contract platform.
Before the advent of ERC20 token development , developers used different terminology in their code — for example, one token uses [totalAmount] and another uses [totalNumber].
Exchanges and wallets needed to build their platforms to work with the code of each token.
Thanks to the universal standard, new tokens can be automatically sent to an exchange or transferred to a wallet after they are created.
ERC-20 tokens have played a large role in making many cryptocurrencies and tokens available for mass use, given the ease and potential for interoperability with other Ethereum token standards.
What does this have to do with the decentralized finance (DeFi) industry?
For the most part, the DeFi industry is based on the Ethereum blockchain.
ERC-20 matters to DeFi because it is the official protocol that offers improvements to the Ethereum network.
Ethereum can support DApps — decentralized applications. These DApps are built on the existing Ethereum blockchain, combining it with the underlying technology.
In exchange, Ethereum charges developers for the computing power on their network, which can only be paid in its currency, ETH.
Depending on its purpose, a DApp can create ERC-20 tokens to act as a currency, a stake in a company, to earn points in a loyalty program, or even as proof of ownership.
DeFi allows DApps to be built on top of decentralized technology, rather than being created and controlled by one centralized organization or company. DApps empower DeFi by being a means of putting its mission into practice.
How to understand where ERC-20 tokens can be used?
There are over 200,000 ERC-20 compliant tokens on the Ethereum blockchain, but only 2,600 of these tokens are tradable. This is because around 70–80% of them are just test tokens for development and only have a few recorded transfers, which you can track on CoinMarketCap. In order for a token to be listed on an exchange, it must at least have a business model and value to make it “official” (though, of course, each exchange has its own, more specific listing rules).
Blockchain researchers like Ethplorer allow you to track all the activity around these tokens.
As you acquire more ERC20 token development service compatible tokens, you will want to track them and see how they perform.
What most people don’t realize is that you can also track your portfolio using a blockchain explorer. You can use the same explorer to see the status of a transaction, check where your cryptocurrency came from, or view the average mining fee.
You can get the same amount of data from a regular Ethereum block explorer, including the USD value of your coins and a portfolio performance chart, as you can from the dedicated trackers used by professionals.
How to start trading and using tokens?
It all starts with setting up a cryptocurrency wallet, such as the previously mentioned MetaMask or MyEtherWallet.
Once you’ve done this, connect your wallet to a blockchain explorer like Ethplorer to track the value of the tokens you want to use and trade.
Simply enter your wallet address into the search field — the same field where you would normally insert your transaction ID — and click on Search.
Ethplorer will provide you with a summary of the address’s portfolio, including the total USD value with all tokens. There’s also a historical performance chart where you can choose between different intervals: one month, six months, date range, and so on.
Essentially, this is what you are looking for in a portfolio tracker — the value of the entire portfolio in US dollars at any date in the past.
The ERC-20 token has played a fundamental role in the development and adoption of digital currencies into the mainstream. While some have raised the criticism that it is too easy for anyone to create their own tokens to create ERC20 token , the token rules and guidelines have provided a benchmark for other Ethereum tokens to follow. Overall, this helps create a healthier ecosystem for the future.